Sometimes even when you get it right, it doesn't matter.
This morning the stock of an initial public offering, Workday (WDAY), a cloud-based software company, was priced at $28 per share by Morgan Stanley and Goldman Sachs and opened as high as $48. That's 40x sales. Not 40x earnings, 40x sales. That makes it the single, mostly-richly-valued company I follow, a $7.5 billion concern with no earnings that is spending aggressively to take share in the cloud space. You hire Workday, you tend to save 50 cents on every dollar that you spend in taking out costs that are largely related to personnel and human resources hardware and storage expenses that it replaces by putting their data in the cloud.
Yet frankly, the whole thing is absurd. The stock is so overvalued as to take your breath away. It's as if we have just gone into the Wayback machine and ventured right into 1999, the epicenter of the dot-com bomb blast.
Yet, here's a shocker. You shouldn't blame management or the underwriters for this travesty of a valuation. This was no Facebook (FB). They really did everything right. Management didn't choose to sell any on the deal. In fact, many insiders BOUGHT on the deal. Neither Morgan Stanley, Goldman nor management elected to raise the price of the deal to anywhere near where the demand was, so as not to be too greedy. The company allowed 14% of its stock to go public, so it is not one of those sliver deals I talk about, the ones where so little is offered that it has to pop no matter what.
And most important, Chairman and Co-CEO Aneel Bhusri, wasn't perturbed or upset that the bankers left so much on the table. It would have been reasonable to think that Workday had a right to demand every last dollar, but Bhusri told me and my colleagues at "Squawk on the Street" that he wanted the deal priced to as close as the comparables, the other companies in the space, and not a penny more than that.
They were anything but avaricious vs. the greedy ravenous buyers.
Nevertheless, even as everyone involved with bringing this deal did everything right, we are stuck with an opening that immediately took the company's stock to the stratosphere of valuations.
How can that happen? Simple. This is a tech company with sustainable long-term growth coming public at a time when one of the largest sectors of the S&P 500 has so little growth to go around that it's become a pathetic parody of a cohort. When the personal computer market away from Apple (AAPL) is shrinking, when spending on hardware is being radically curtailed in large part because of the cloud, but also because of slowing economies worldwide and when two cell phone companies are crushing everyone else, there's a terrible dearth of high-growth companies to choose from.
Into that breach stepped Workday. Even though the pricing was richly valued., the need for a high growth entry in a manager's portfolio drove that opening price. The institutions got so little on the deal that they figured it was better to pay up to get a full position and that required this crazy aftermarket buying that gives these customers an average basis that while above the actual IPO pricing is certainly below where it is ultimately opened.
Look, in the end it comes down to supply and demand. We don't have a lot of supply of companies that are growing at 98% and we have endless demand for any companies with the accelerating revenue that Workday has.
So Workday opens at $48. As illogical as that is, when you consider the ice cold sector, the needy buyers and the reasonable sellers, it makes a ton of sense that this stock opened at a $20 premium even as you need an oxygen mask to fathom it all.
Here's my bottom line: if you got some on the deal, you are a winner. Congratulations. Just remember that the history of companies selling at 40x earnings that succeeded is small and as good as Workday is, the odds of success make it so that you should thank feel blessed and just take that wonderful gain off the table. I bet someday you will get a chance to buy it lower and cheaper and you won't regret taking the profit you were so lucky to get.